Banks’ profit slump reinforces analysts’ views the share price rally is at its peak

Market watchers had been saying for months the mid-year reporting cycle would mark the peak for the banking sector and the numbers reported back up their predictions.

The earnings of Australia’s banks appear to have peaked thanks to interest rates and competition.

And market watchers say the industry faces a profit pinch point as the need for spending on tech and systems looms.

During the latest reporting cycle the big four banks revealed a combined $15bn in profits, which were down 10.5 per cent from their peak in the first half of 2023.

All the banks have highlighted competition which has driven the industry into a home loan feeding frenzy, and have posted double-digit declines in the performance of their personal banking businesses.

Net interest margins across the sector fell as savers sought the best rates from deposits, while the rise of brokers led more borrowers to decide on the lowest cost loan.

The only bright spot for many was business lending, riding high on benign conditions, despite the gloom around consumer spending as higher interest rates dragged on borrowers.

But Wilson Asset Management Leaders Fund portfolio manager Matthew Haupt said the share buybacks announced in the latest results cycle would support share prices for the time ahead.

However, he said banks were “extremely expensive” and that earnings figures had failed to impress.

Bank profits took a hit in the first half of the 2024 financial year.

“It’s hard to get too excited about them,” Mr Haupt said.

“For me it’s all about capital management, it’s not really around their earnings.”

ANZ’s $2bn buyback – the biggest ever unveiled by the lender – came alongside NAB’s $1.5bn sweetener. Westpac also announced it would spend a further $1bn buying its shares.

Westpac, which announced a $3.34bn first-half profit, down 16 per cent, is the biggest bank in WAM’s Leaders Fund, which holds $1.7bn of large caps. But Mr Haupt said it was unwinding this position.

CBA, which revealed a $2.4bn third-quarter result, was the second largest lender in the portfolio. Mr Haupt said that although the bank was performing well it was “incredibly expensive”.

Macquarie analyst Victor German even said CBA, which is up 19.5 per cent over the past 12 months to $117.54, was “not sustainable”.

Mr Haupt said NAB, which experienced a 12.8 per cent profit slide to $3.5bn, had also likely topped its performance in the market and that the “simplification story” for the lender under former chief executive Ross McEwan was complete.

NAB's new chief executive, Andrew Irvine. Picture: David Geraghty

ANZ, which posted a $3.55bn cash result, was worst placed and Mr Haupt said the bank had the “weakest franchise”. He said it faced questions about leadership planning as CEO Shayne Elliott was approaching eight years in the top job.

But Mr Haupt said the banks did benefit as there were “not many alternatives” in the market that offered investors as reliable returns, and that the non-bank sector was facing the bulk of the pain set to flow through the economy.

He said these lenders, which had stepped in to replace the banks in lending to non-prime borrowers and bankrolling commercial property markets, were heavily exposed to a potential downturn.

“You’re going to get arrears, stress and more regulation,” Mr Haupt said.

Mr Elliot has said this was a sign of “resilience” in the economy and that enough borrowers were ahead on their loan payments to avoid a serious squeeze.

He also said it might be a sign the banks had withdrawn from servicing good customers in a bid to avoid “really bad credit risk”.

But signs of stress may also be elsewhere. Suncorp Bank on Friday reported that it had seen an $85m worsening in arrears across its loan book driven by home borrowers.

A regional lender, largely servicing Queensland, Suncorp Bank is set to join ANZ’s stable after the Melbourne-based bank’s $4.9bn offer.

Mr Elliott said a key benefit of picking up Suncorp Bank’s customers was the opportunity to spread out the cost of ANZ’s major tech spending on its new core banking platform ANZ Plus across more customers.

ANZ is spending big on the new bank platform which has about 800,000 users, with some bumps along the way in a pivot some senior figures in the banking sector deride.

The move signals a broader challenge for the banks, according to Deloitte Australia national banking sector lead David Myers, who said many were sitting on ageing legacy systems and faced significant spending on technology.

NAB has moved to consolidate systems across the bank, including culling six fraud systems to just five, as well as consolidating three collection systems into one, over the past six years.

It said in its latest results that its expenses surged by 5.8 per cent in the half, mainly driven by technology and compliance costs. Analysts expect NAB will have to spend as much as $2bn a year on technology over the coming years.

Westpac faces its own challenges. It will spend $2bn on technology to finally consolidate St George into its core platform as well as slash 120 systems across its tech stack.

“The banks have challenges, they do have legacies,” Mr Myers said.

But he said the concentration of the Australian market meant there was less pressure on banks around tech systems.

Shayne Elliott delivers ANZ’s half-year results. Picture: Arsineh Houspian

“It is more apparent in the UK where the competition and regulatory authority has allowed challenger banks to come in and put pressure on the incumbents,” he said.

Mr Myers said the banks were facing compliance costs around anti-money laundering, and that the sector faced an arms race with potential criminals.

“As soon as you put something in place, someone else will do something clever, this is why people get anxious about cryptocurrencies and about mules,” he said.

Originally published as Banks’ profit slump reinforces analysts’ views the share price rally is at its peak